How To Build Your Company's Maximum Market Value

Business owners always want to know what makes a company sell-well and sell-quickly. It is a wise inquiry. When building an asset as significant as a privately-owned business, it’s prudent to have a basic understanding of what drives value throughout it’s development so market value, at any time, is maximized.

When we sit down with business owners, and coach them on sale-ability, we begin with the basics of wealth building for the privately held company. We share the key indicators, which set a company up for maximum value, and we guide them in areas where a redirection of focus may prove highly profitable.

The process begins with value-building, ahead of the time for sale.

• We often tell business owners we wish we could meet them 6 – 24 months before they are ready to sell so we can guide them through some basic strategies, which position them for top sale price when the time comes to sell. We conduct sale-ability analyses for these companies to outline the strengths, weaknesses, opportunities and threats that exist when going to market. With enough time, and awareness, many concerns are easily resolved while strengths and opportunities are developed and maximized. By the time the company approaches suitors they are highly attractive and substantially more valuable.


• It begins with understanding premium sale-ability and enhancing marketability. A business should be highly focused and ideally, a leader in its niche. Our firm once sold a company that manufactured both plastic components for snowmobiles while also producing anti-static packaging. Each individual core business was highly desirable and brought strong pricing offers but together the company was not as valuable as it might have been in either of the more focused segments. The seller could not easily separate the two companies. The result was a company worth less ‘together’ than two apart.


• An outside investor wants to see a second-tier management team in place that can effectively run the company, independent of ownership. The more dependent the company is on the owner, the less confidence a buyer has in the sustainability of success after the owner has left.


• Companies should evaluate customer dependency and work to ensure that no one customer holds a large share of total revenues or profits. Ideally, we recommend that companies target the building of a broad enough base of customers to ensure that no more than 20-25% of total revenues are held by a single customer.


• Roadblocks are often unintentionally created within a company making its sale difficult. Simply identifying and correcting these barriers prior to sale can significantly increase not only sale price but also the probability of the sale actually closing. Financial statements often need to be scrubbed and reorganized. Additionally, any intangible assets should be identified, assessed, and protected.


• In a family business, the role and value of working relatives needs to be assessed. A buyer wonders if these employees are critical to the company’s success or if they are easily replaced and, if so, at what cost. Relatives earning more than fair market value for their services, if they are expendable or replaceable, may actually mean that a buyer can make more after their replacement. Excessive compensation is justifiably added back to income, for valuation considerations. The roles and compensation structures, particularly as related to family in the business, need to be evaluated and considered.


• A unified owner objective is critical to quick and successful sale. An ownership team that is split on the desire to sell will spook buyers. Minority stockholder issues can also complicate purchases. Troubled partnerships will stir up indemnification concerns. Finally, complex family issues risk bogging down the process, sometimes rendering an otherwise valuable business worthless. By identifying these variables and working toward solutions, sale can move more quickly and result in a higher price.

Owners next take careful steps to attempt to quantify and evaluate the value they have created.

• Business value is a complex formula dependent upon many variables, often within the same industry. A buyer looks at more than total revenues or profitability to determine his valuation. In addition to sales and income, balance sheet is considered, overall market-demand, synergies within other business ventures, strength of the existing management team, stability of earnings, percentage of earnings on total revenues, short- and long-term growth opportunities, and overall level of additional capital investments required to meet growth goals. Sellers who have arbitrarily picked a selling price without fully understanding each of these variables almost always have unrealistic expectations of value.


• Additionally, buyers will evaluate purchase feasibility. They must understand cash flow adequacy, payback period, and their individual return-on-investment. In today’s economy, lending is another variable affecting the ease and speed of sale. Companies with strong, stable profits coupled with robust asset values and strong balance sheets most easily win financing.


• It’s also important to understand how industry-specific acquisition activity affects value. We tap into marketplace buzz and listen to what is being bought, by whom, why, and for how much. A well-positioned seller uses this information to strengthen its go-to-market approach and maximize selling terms.


• Sale price is not set by the seller but, if structured correctly, offered by the buyers. Additionally, it’s the existence of real competition, which drives up price: a simple outcome of the law of supply and demand.

As owners come closer to consideration of sale, they also need to really get some fundamental understanding of the selling process.

• It is extremely important to really understand the reasons behind selling. Many non-business owners wonder why anyone would ever consider selling a profitable and stable company. However, sellers have often created their success on the back of many personal sacrifices. Lost time with family, sleepless nights, long hours working, and limited social lives take their toll. There comes a time to cash-in on the hard work and enjoy the fruits of their dedication and investment. Sale is a means of protecting retirement security, reducing risk, and solidifying a family inheritance.


• One thing most business owners probably haven’t yet completely grasped is that market timing is extremely critical in determining when to sell. Often owners have never even considered selling value, until something occurs to force the idea upon them. Instead, they wait for their own pre-determined time to exit, like retirement at a specific expected age, before considering. However, these variables almost always miss market opportunity and can often result in a value that is 50% less, simply because ownership neglected to react when value was at its highest.


• Competition is the most important variable in achieving a top sale price. If the buyer doesn’t feel like he might all together lose the opportunity to buy, he will not have the motivation to push his price up to its highest point. As an example, several years ago we worked with a systems company in Kentucky who received a purchase offer of $10 million. They asked us to help increase the price but confided that, in the end, they wanted to sell to this original buyer. They agreed to let us court other buyers, nonetheless, and through the addition of raw buyer competition we increased the purchase price 4-fold. That original buyer paid $25 million cash at close and an additional $15 million in earn-out.


• It is critical that business owners considering sale understand the importance of a strong team to guide the process, which is complex, foreign, risky and even emotional. Although we highly recommend confidentiality from customers, vendors and employees whenever sale is considered, the CFO usually needs to be included in the internal efforts toward sale. A strong and experienced merger and acquisition advisory team, using an “investment banker”, will identify qualified buyers and build critical competition. Additionally, they’ll minimize risk, keep buyers interested and moving forward, and guide the entire process while coordinating details and other necessary professionals, such as attorneys and accountants.


• It’s not inexpensive to hire good seller representation but it almost always results in higher proceeds after sale. On an average sell-side engagement our firm spends at least 200-300 hours in the first month alone. A business owner will find it difficult, if not impossible, to emulate such dedication to the process. He must simultaneously run the company, and focus on keeping it strong and growing. Selling a company is never a “spare time” endeavor.

Business owners who grasp these basic understandings and refocus internal efforts, as needed, will profit handsomely when the time comes to take their company to market.

Danette Kohrs, Founding Partner / Principal Advisor
Trinity <^ Strategic Growth Solutions

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